U.S. Dollar Stays Strong, Rising Bond Yields on Currency Pairs

April 18, 2024

The focus is intensifying on the U.S. dollar’s interaction with major currency pairs such as EUR/USD, GBP/USD, USD/JPY, and USD/CAD. The EUR/USD pair, for instance, has shown resilience, rebounding from a crucial support at 1.0600 and ascending past 1.0650. Technical indicators set resistance levels at 1.0695 and 1.0725, with potential to reach 1.0820. Should the pair face renewed downward pressures, maintaining above the 1.0600 level will be vital for avoiding a drop towards the year’s low around 1.0450.

The influence of high interest rates on equity markets is complex. Despite prevailing anxieties, increased rates have not uniformly impacted stock market performance. Historical evaluations reveal a mixed impact: the S&P 500, for instance, has yielded higher returns during periods of rising rates, signaling that such environments often accompany strengthening economic conditions. For example, when the 10-year Treasury yield exceeded 6%, the S&P 500’s average annual return escalated impressively to 14.5%.

Bond Yields in April 2024

Presently, the trajectory of bond yields is noteworthy. Since early April, the 10-year Treasury yield has ascended by approximately 40 basis points to about 4.58%, marking its highest since November 2023. This upsurge contrasts with a more than 4% drop in the S&P 500 over the same period, reflecting the market’s sensitivity to interest rate expectations and inflation concerns.

Looking forward, the bond market’s response, coupled with projected economic growth and inflation management, suggests potential positive implications for equities. Analysts, including Brian Belski from BMO, anticipate that if yields stabilise between 4% and 5%, and with strong employment and corporate earnings figures, the stock market could see considerable gains towards the end of the year.

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